While the information in this article about regular rate of pay compliance is aimed particularly at California employers, business owners and leaders everywhere should take note. California is considered one of the most progressive states for employment law and other progressive states frequently follow their lead. How can business owners, decision-makers, and corporate leaders prepare themselves against this risk? 

California, one of the largest states in the union, has so much to offer from sweeping ocean vistas to rugged desert and everything in between. It is home to both verdant farmland and huge metropolitan cities.

It is also one of the most employee-friendly US states, so employers based in California or with employees working from the state must pay special attention to the laws and regulations enjoyed by those working and living in California. Considering California’s diversity in both industry and workforce, this can be a measurable task. 

Whether your business serves the needs of the vast tourism industry (those ocean vistas mentioned above, and let’s not forget Napa Valley), operates in the tech space or any number of other types of industries found within its borders, understanding the rules and regulations of employment law is required for any business hoping to successfully operate within California.

So, why do we care about Regular Rate of Pay Compliance? Because California is quite serious about paying employees appropriately, and noncompliance can result in costly lawsuits.

Understanding Rate of Pay Compliance

First, a few definitions to get you started…

Base Hourly Rate – The hourly wage an employee earns before any additional payments are added

Incentive Pay – Financial reward for performance rather than pay for hours worked

Regular Rate Calculation – Average hourly rate calculated by dividing total pay by total hours worked

Premium Payment – Payment equivalent to one hour of wages due to employees each day they work through mandated breaks

This is where things get interesting. California mandates meal, rest and recovery breaks for non-exempt employees and meal breaks for exempt employees. It is the employer’s responsibility to ensure breaks are taken within compliance of the law. Extenuating circumstances sometimes preclude employees from taking their legally required breaks, so California has implemented a Premium Payment schedule to compensate employees. These Premium Payments are due within the same pay period the missed break occurred and are in addition to any actual time meal, rest or recovery break time worked.

Even when operating with the best of intentions, employers have found themselves in legal trouble when miscalculating these Premium Payments. Most employers assume Regular Rate of Pay and Base Hourly Rate are synonymous terms.

However, in the instance of premium payments, they are not. As stated in the definitions above, the Base Hourly Rate is the agreed-upon hourly wage for the employee. The Regular Rate of Pay is a calculation dependent on the Base Hourly Rate plus Incentive Pay. The Regular Rate of Pay is frequently more than the base hourly rate, especially if the employee regularly enjoys any type of Incentive Pay.

Understanding Incentive Pay

What exactly is incentive pay? Incentive pay is overtime and any other non-discretionary payments, which sometimes include bonuses but are more often seen as commissions and piecework earnings for which the employee is eligible.

Non-discretionary payments include hiring or sign-on bonuses when NOT tied to introductory performance or retention, flat-sum bonuses not dependent on hours worked or any incentive pay such as that which would be tied to performance, attendance, productivity, etc.

Perhaps just as importantly, what is NOT Incentive Pay? In addition to tips and retirement plan contributions, a non-exhaustive list of pay types that should not be included when calculating the Regular Rate of Pay are shown below:

• Gifts – Occasional gifts which are not based on the hours an employee works or their production of materials.
• Payments Not for Hours Worked– Vacation pay, holiday pay, sick leave pay and other pay for days off including unused vacation payouts. It’s important to note that this also includes payments for meal and rest period premiums.
• Reimbursements– Reimbursements for expenses (ex. travel, exam fees, etc.), unless that compensation was specifically offered as a routine reimbursement, such as with cellphone reimbursements (but not always, so it can be confusing!).
• Certain Premium Payments– Overtime premiums outside of differentials and hazardous pay.
• Reporting and Call-Back Pay– Infrequent and/or sporadic pay related to insufficient notice of scheduling changes.

Business owners and their accountants should work closely with their payroll provider to ensure compliance in calculating the Regular Rate and it’s never detrimental to run scenarios past a Human Resources professional or a qualified employment attorney.  

Managing Workforce and Pay Compliance

While it would be impossible to completely avoid the need for calculating the Regular Rate of Pay, employers can mitigate the risk by requiring employees take their mandated breaks, as scheduled and on time and follow a progressive discipline procedure if the employee regularly refuses to comply. This does not apply to extenuating circumstances in which the needs of the business result in missed breaks.

Therefore, developing a robust and cross-trained staff is paramount to ensure your business has adequate coverage as a cross-trained employee can fill in another area when business volume dictates, which helps prevent a single point of failure in any procedure. While some business owners may perceive this as “over-staffed,” in reality the amount of staffing is adequate, or in other words, right-sized.

An adequate amount of staffing often means employing slightly more than the minimum employee headcount needed to complete all of the work. Small business owners sometimes fall into the trap of believing this is too expensive. In reality, it is more cost-effective in the long run as the business is completely covered at all times of day and year.

This can also help the business avoid fines and penalties for non-compliance of premium payments. Businesses are understaffed when an employee is absent, or needs to be absent, and urgent matters simply do not get done in this employee’s absence.

This is not fair to the employees or to the business. This also opens the business to risk in terms of fines or penalties when employees are unable to take mandated breaks. Additionally, regular rest and breaks are universally believed to ensure employees remain alert and productive.

Workforce Planning for Improved Productivity

HR Service, Inc. has developed a robust and comprehensive tool for right-sizing the workforce of any business, found here: HR Service, Inc. Workforce Planning Tool. This tool provides a strategic analysis of human capital. Admittedly, this can be time-consuming and tedious, but the end result is appropriate labor and production costs.

This tool provides a roadmap for running a business with as much efficiency as possible.

Human Resources can be complicated. HR Service, Inc. can help.  

By Nikki Blanche, Senior HR Business Partner at HR Service, Inc.